Bank of Korea Governor Shin Hyun-song stated on July 29 that he believes it is necessary to continue the trend of interest rate hikes. This reaffirms the bank's commitment to maintaining a tightening stance after raising the benchmark rate for the first time in three and a half years earlier this month.
During a report to the National Assembly's Economic Committee, Governor Shin said, "The timing and pace of any further increases will be determined by comprehensively assessing inflationary pressures, the pace of economic recovery, and financial stability conditions."
He projected that the South Korean economy would continue to show solid growth, particularly driven by the semiconductor sector. "The global spread of artificial intelligence (AI) has expanded growth in the semiconductor sector," he noted, adding that the favorable conditions in the semiconductor market are expected to persist and gradually influence other sectors, sustaining robust growth.
Shin's outlook is supported by recent economic growth rates that exceeded expectations. With strong semiconductor exports and a gradual recovery in domestic demand, the growth trajectory is better than initially anticipated. The Bank of Korea expects this export-driven growth to continue, with consumption and investment improving modestly.
Regarding inflation, he forecasted that it would remain above target levels for an extended period. "Given the uncertainties surrounding international oil prices due to the situation in the Middle East, the impact of rising costs and exchange rates, and increasing demand pressures from income improvements, inflation is likely to exceed target levels for a considerable time," he said.
He emphasized the need to closely monitor inflation trends due to the significant uncertainties surrounding external variables like international oil prices and exchange rates. It is interpreted that if cost-push inflation pressures are not fully resolved and demand pressures from economic recovery are added, achieving price stability may take longer than expected.
The domestic financial system remains generally stable, supported by the expanding growth of the real economy and the resilience of financial institutions. However, concerns about financial imbalances persist as housing prices in the metropolitan area continue to rise and household borrowing for investment increases. Governor Shin warned that the high volatility in financial and foreign exchange markets, along with the rising housing prices in the metropolitan area, pose potential risks for financial imbalances.
Market analysts interpret Governor Shin's reiteration of the tightening stance following the recent interest rate hike as a clear indication that there will be no immediate changes to the monetary policy direction. Attention is now focused on whether the Monetary Policy Committee will implement consecutive rate hikes next month. Following a stronger-than-expected GDP growth rate in the first quarter, the second quarter also exceeded market expectations, supporting the case for tightening. If the consumer price index for July, to be released next month, remains high, there is speculation that the Bank of Korea may pursue back-to-back interest rate hikes.
* This article has been translated by AI.
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